The Big Short

I was a huge fan of the movie, especially with regards to how well the characters were developed while still giving audiences an understanding of exactly what was happening inside the banks as the 2008 crisis developed and happened. Visuals are sometimes amazingly powerful, and some of the changes that the characters went through were great from a character development perspective.

Well, the book is based more on nonfiction, so it’s less of a ride that’s influenced by emotion and crazy character developments. However, it presents a much more comprehensive look at exactly why the crisis unfolded (to an extent) that I appreciated reading about. The characters are still emphasized to a large degree, which I found kind of surprising for a book that was supposed to be about the crisis. I think maybe I would have appreciated reading more about the collapse and the reasons behind it. Here’s a list of some important reasons as to why the destruction happened:

  • Housing prices were at an all-time high, as they’d been growing for 50+ years
  • MBS (mortgage-backed securities) made up the secondary mortgage market, which were basically ways that loan-people sold loans to big companies
    • Big companies had an incentive to buy these loans outright as people paying off their mortgages would be a source of fixed income (mortgage bonds)
    • Mortgages were taken by people had different amounts of credit (debt credibility) to them
    • As a result, large groups of mortgages were bundled together and separated into tranches, which were basically groups that were “more” or “less” credible depending on the average FICO score of the people that took those
  • Because of subtleties in how the tranches were given scores (securities are given scores by Moody’s and S&P in NYC), the banks were able to take advantage and sell lower quality securities disguised as higher quality ones
  • The situation was further compromised by the invention of synthetic CDOs
    • CDO = collateralized debt obligations
    • Basically involved taking lots of mortgages from B-level tranches (low quality) and grouping them together
    • This was thought of as diversification of assets, though it wasn’t taken into account how if certain homes in one tranche would fail all the others would too (housing market isn’t independent the way stocks might be)
    • Compounded bets on a single mortgage to be much, much more
  • Because of this pressure to sell mortgage-related securities, people at the lowest level (who made loans) were pressured to give loans to people who were less qualified to take them
    • Strong usage of teaser rates (5% for the first two years, 12% afterwards) made appealing offers to those who didn’t make much money
    • Many of the failed mortgages were from subprime borrowers, or people that weren’t super credible with debt before (or didn’t make much money)
      • This market was heavily targeted, since most of the well established people already had mortgages, but these people didn’t
  • Because the housing market was going up, people simply refinanced their home when they couldn’t afford the mortgage payments any longer; the banks were then completely paid off and getting the person to pay was no longer a problem
  • After a few years, the teaser rates expired and house prices started declining (not sure why)
    • People couldn’t refinance to pay off mortgages and they couldn’t afford the larger payments
    • They defaulted in extreme amounts
  • All this defaulting caused all the MBS to flop over and be worthless, as well as the CDOs that piggybacked off of them
  • The people who profited were those that “saw it coming” and bought insurance on the housing market through the form of credit default swaps
    • Insurance means if it failed, they’d get paid
    • And…the housing market failed spectacularly


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